Shares of Pandora Inc (P) soared 5.3% ($1.36) to close at $26.89 on Oct 2, after the Internet radio service provider announced that listening hours jumped 18.0% from the year-ago month to 1.36 billion in Sep 2013. Listening hours were slightly better than 1.35 billion reported in Aug 2013.
Pandora’s share of total U.S. radio listening surged to 7.77% compared to 6.53% in the year-ago month and 7.46% in Aug 2013. The company’s active listener base increased from 58.3 million in September last year and 72.1 million in Aug 2013 to 72.7 million last month.
Although the much anticipated metric reflects Pandora’s strong position in the Internet radio market, we believe that the rate of growth declined on a monthly basis. In August, the active listener base jumped approximately 900K from the month of July, while the increase was a modest 600K from the month of August to September.
We believe that the slowdown resulted from the launch of Apple’s (AAPL) iRadio service last month. On Sep 23, Apple announced that the iTunes Radio service attracted more than 11 million unique listeners within a week of its launch.
We note that Pandora enjoys a first mover advantage in the music streaming industry. However, increasing competition from the likes of Apple, Spotify, Google (GOOG) and Sirius XM (SIRI) will make it difficult for the company to aggressively gain market share going forward.
Pandora’s management is well aware of this situation. The company expects advertising revenue growth to slow down and lesser listener hours in the near future. Pandora expects to continue to report losses in the near term.
Nevertheless, we believe that Pandora’s already popular service, driven by its effective discovery engine and well established infrastructure places it well to compete over the long term.
Additionally, Pandora’s expanded stock offering (13 million at $25.00) will fetch it approximately $378.8 million. The company expects to use a portion of the proceeds for making strategic acquisitions that will boost subscriber base. The company will also open new sales offices and compete with radio stations for attracting local advertising, which is a significant opportunity going forward (currently a $15.0 billion market).
Currently, Pandora has a Zacks Rank #3 (Hold).